19849ipcc Blec Law Vol2 Chapter6b

8/13/2019 19849ipcc Blec Law Vol2 Chapter6b

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UNIT 2: PROSPECTUS

PROSPECTUS

Question

Explain the meaning and role of the Prospectus.

Answer

Meaning of Prospectus: Section 2(36) of the Companies Act defines the term

Prospectus. Accordingly, it means any document described or issued as prospectus,

notice, circular, advertisement or other document inviting deposits from the public or

inviting offers from the public for the subscription or purchase of any shares in, ordebentures of a body corporate. In this context, it should be noted that prospectus is not

an offer in itself but an invitation to make an offer, signifying thereby that on acceptance

of such an invitation by any member of the public, no binding contract between him and

the company comes into being. Application for purchase of shares or debentures or for

making a deposit constitutes an offer by the subscriber to the company and it is only on its

acceptance by the company that a binding contract comes into existence.

Role: The prospectus is the basic document on the basis of which the intending investors

decide whether or not they should subscribe to the shares or debentures. Therefore, the

law requires unstinted disclosure of various matters through prospectus and forbids

variations of any terms and conditions of a contract contained therein except with theapproval and authority of the company in general meeting [Section 61].

Those who issue prospectus holding out to the public great advantage which will accrue to

persons who take up shares on the representations contained therein, are bound to state

everything with scrupulous accuracy and not only to abstain from stating as fact that

which is not so but to omit no fact within their knowledge, the existence of which might in

any degree affect the nature or extent or quality of the privilege and advantages which the

prospectus holds out as an inducement to take shares [as per Kindersely V.C. in

Burnswickand Canada Railway Co. vs. Mullridge].

It is therefore essential that the information statutorily needing disclosure is stated fully

and precisely so that the investing public which is ignorant of the present and futureprospects of the company may get all the information which is likely to affect the public

mind. It is only to protect the members of the public against their being misguided by half

truths or falsehoods that the law casts a liability on various persons connected with the

issue of the prospectus to compensate every person (who subscribes on the faith of the

prospectus) for any loss or damage he may have sustained because of the inclusion of

any untrue statements in the prospectus [Section 62].

Copyright -The Institute of Chartered Accountants of India


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Business Laws, Ethics and Communication

6.58

When Prospectus is not required to be issued?

Question

State the conditions where the issue of Prospectus is not necessary?

Answer

As per Section 56 of the Companies Act,1956, the issue of a Prospectus is not necessary

in the following cases:

(i) When shares or debentures are offered to existing holders of shares or debentures

[Subsection (5)].

(ii) When the issue relates to shares or debentures uniform in all respects with sharesor debentures previously issued and dealt in or quoted in a recognised stock

exchange [Sub-section (5)].

(iii) Where a person is bona fide invited to enter into an underwriting agreement

[Subsection (3)].

(iv) Where shares are not offered to the public [Sub-section (3)].

Requirements as to the issue of Prospectus

Question

What are the requirements as to the issue of the Prospectus?

Answer

Comprehensive rules and regulations have been incorporated into the Companies Act

1956 in respect of this basic document which is the only source for the investors to

ascertain the soundness or otherwise of the company. Since the prospectus is intended to

save the investing public from victimisation, the Legislature has aimed at securing the

fullest disclosure of all material and essential particulars and laying the same before all

the prospective buyers of shares. Briefly the rules and regulations are as follows:

(i) Dating of prospectus - According to Section 55, every prospectus must be dated.

This requirement is designed to ensure a prima facie evidence of the date of its

publication. However, this evidence may be rebutted by a contrary evidence.

(ii) Registration of prospectus- It is absolutely necessary for the company to deliver

to the Registrar a copy of every prospectus for registration. It must be made on or

before the prospectus is published. But the prospectus must not be issued more

than 90 days after the date on which a copy of it is delivered to the Registrar for

Registration.



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The Companies Act, 1956

6.59

(iii) Approval of prospectus by various agencies : The draft prospectus has to beapproved by various agencies before it is filed with the ROC of the concerned

State.

(iv) The lead financial institution underwriting the issue, if applicable: The draft

prospectus is vetted by SEBI to ensure adequacy of disclosures. However, vetting

by SEBI does not amount to approval of prospectus. SEBI does not take any

responsibility for the correctness of the statements made or opinions expressed in

the prospectus.

Question

What are the authorities whose approval must be sought for issue of prospectus?

Answer

Approval of prospectus by various agencies: The draft prospectus has to be approved

by various agencies before it is filed with the ROC of the concerned State. The various

authorities who approve the prospectus are the following:

(i) All the lead managers to the issue.

(ii) Each of the stock exchanges where the shares of the company are listed and where

the shares/debentures are proposed to be listed.

(iii) The lead financial institution underwriting the issue, if applicable.

The draft prospectus is vetted by SEBI to ensure adequacy of disclosures. However,

vetting by SEBI does not amount to approval of prospectus. SEBI does not take anyresponsibility for the correctness of the statements made or opinions expressed in the

prospectus.

The Ministry of Corporate Affairs, vide its circular 10/8/87-CL V No. 7/91, dated

28-2-1991 advised the ROCs to ensure that in respect of every prospectus of public

issues which comes up for filing with them the merchant bankers to the issue, whether as

lead managers, co-managers, advisers or consultants are only those authorised by SEBI.

Each merchant bankers has been given a code number.

It was also decided that ROC shall not register a prospectus where prior to registration of

the prospectus, the ROC before whom the prospectus is filed for registration is informed

by SEBI that the contents of prospectus filed are in contravention of any law or statutory

rules and regulations.

Abridged form of Prospectus

Question

What is meant by Abridged prospectus. Under what circumstances a company issuing

abridged prospectus need not accompany the prescribed details along with the application

form for issue of shares? (PE-II, Nov. 2004)



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Answer

Abridged Prospectus: As per Section 2(1) of the Companies (Amendment) Act, 2000

abridged prospectus means a memorandum containing such salient features of a

prospectus as may be prescribed. By the Amendment Act of 1988 the company was

permitted to furnish an abridged form of prospectus along with the application for shares

or debentures instead of the full prospectus. The Government has revised the format of

abridged prospectus to provide for greater disclosure of information to prospective

investors so as to enable them to take an informed decision regarding investment in

shares and debentures.

The abridged prospectus (in Form 2A) and the share application form should bear the

same printed number. The investor may detach the share application form along the

perforated line after he has had an opportunity to study the contents of the abridged

prospectus, before submitting the same to the company or its designated bankers.

Circumstances where details are not required in the abridged prospectus:

(1) Where the offer is made in connection with a bona fide invitation to a person to

enter into an undertaking agreement with respect to the shares or debentures.

(2) Where the shares or debentures are not offered to the public.

(3) Where the offer is made only to the existing members or debenture holders of the

company.

(4) Where the shares or debentures offered are in all respects uniform with shares or

debentures already issued and quoted on a recognized stock exchange.

(5) Where a prospectus is issued as a newspaper advertisement, it is not necessary to

specify the contents of the memorandum, or the names etc., of the signatories to

the memorandum or the number of shares subscribed for by them.

Question

What is meant by Abridged Prospectus? Is it necessary to furnish abridged form of

prospectus along with the appl ication form for shares? Under what circumstances an

abridged prospectus need not accompany the detailed information regarding prospectus

along with the application form? (PCE,June 2009)

Answer

(1) Meaning of Abridged Prospectus:-

According to Section 2(1) of the Companies Act, 1956, an abridged prospectus

means memorandum containing such salient features of a prospectus as may be

prescribed. The memorandum containing salient features of the prospectus



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accompanying the application forms shall be as per rules prescribed by the Central

Government in this behalf. It is however, open to a company to attach full

prospectus along with the application forms.

(2) Abridged prospectus to be issued along with application form:

A company can not issue application forms for shares or debentures unless the

form is accompanied by abridged prospectus, according to Section 56(3) of the

Companies Act, 1956. The abridged prospectus and application form should bear

the same printed number. The investor may detach the share application form

along the perforated line, after he has had an opportunity to study the contents of

this abridged prospectus. The objective of this provision is to reduce the cost of

issue as the detailed prospectus is a very bulky document whereas the contents of

abridged prospectus are limited. Penalty for failure to comply with Section 56(3)

can be a fine of up to Rs.50, 000.

(3) Circumstances under which the abridged prospectus containing all the prescribed

details need not accompany the application forms: An abridged prospectus

containing all the prescribed details need not accompany the application form in the

following circumstances:

(i) In case of bona fide underwriting agreement [Section 56(3)(a)]

(ii) Where shares and debentures are not issued to the public [Section 56(3)(b)].

(iii) where the offer is made only to existing members or debenture holders of thecompany [Section 56(5)(a)].

(iv) In case of issue of shares or debentures which are in all respect similar to

those previously issued and dealt in a recognized stock exchange [section

56(5)(b)]

Statement by Experts

Question

Who is an Expert? When an expert is not liable for the mis-statement in the prospectus

of a public company? (PE-II, Nov. 2002 & Nov. 2006)

Answer

The Experts consent to the issue of Prospectus:

A prospectus may contain a statement purporting to be made by an expert. The term

expert includes an engineer, a valuer, an accountant, and any other person whose

profession gives authority to a statement made by him [section 59 (2) of Companies Act,

1956].



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When an expert is not liable?

An expert who would be liable by reason of having given his consent under sect ion 58 to

the issue of the prospects containing a statement made by him would not be liable if he

can prove.

(i) that having given his consent to the issue of prospectus, he withdrew it in writing

before the delivery of a copy of the prospectus for registration, or.

(ii) that after the delivery of a copy of the prospectus for resignation but before

allotment, he on becoming aware of the untrue statement withdrew his consent in

writing and gave reasonable public notice thereof and the reason therefore, or.

(iii) that he was competent to make the statement and he had reasonable ground tobelieve and did up to the time of allotment of the shares or debentures believe, that

the statement was true. (Section 62 (3).

Question

What is the extent of liability of an expert, in relation to publication of prospectus, for any

mis-statement in the report given by him?

Answer

An expert is liable for any mis-statement in the prospectus, unless

(a) he has given his written consent to the issue of the prospectus and has not

withdrawn such consent before the delivery of the copy of the prospectus to the

Registrar for Registration and

(b) Unless a statement as to his consent and non-withdrawal of it appears in the

prospectus (Section 58).

Section 59(1) provides a penalty of fine extending to Rs.50,000/- for the company

and any other person who is knowingly a party to the issue of a prospectus in

contravention of these provisions.

Shelf Prospectus

Question

Explain the concept of Shelf Prospectus in the light of Companies (Amendment) Act,

2000. What is the law relating to issuing and filing of such prospectus?

(PE-II, May 2002, 2003 &Nov. 2008)

Or

When is a company required to issue a shelf prospectus under the provisions of the

Companies (Amendment) Act, 2000? Explain the provisions of the Act relating to the issue

of shelf prospectus and filing it with the Registrar of Companies. (PE-II, Nov. 2005)



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Answer

Shelf Prospectus

According to Section 60-A as inserted by the Companies (Amendment) Act, 2000 Shelf

Prospectus means a prospectus issued by any financial institution or bank for one or

more issues of the securities or class of securities specified in that prospectus.

Any publ ic financial inst itution, a public sector bank or scheduled bank whose main object

is financing, shall file a shelf prospectus. Financing means making loans to or

subscribing in the capital of, a private industrial enterprise engaged in infrastructural

financing, or such, other company as the Central Government may notify in this behalf.

A company fi ling a shelf prospectus with the Registrar shal l not be required to fi leprospectus afresh at every stage of offer of securities by it within a period of validity of

such shelf prospectus. It shall be required to file an information memorandum. On all

material facts relating to new charges created, changes in the financial position as have

occurred between the first offer of securities, previous offer of securities and the

succeeding offer of securities within the time prescribed by the Central Govt., prior to

making of a second or subsequent offer of securities under the shelf prospectus.

An information memorandum shall be issued to the public along with shelf prospectus fi led

at the stage of the first offer of securities and such prospectus shall be valid for a period

of one year from the date of opening of the first issue securities under that prospectus.

Where an update of information memorandum is filed every time an offer of securities ismade, such memorandum together with the shelf prospectus shall constitute the

prospectus.

Question

What is meant by Shelf prospectus ? Who can file a Shelf prospectus with the

Registrar of Companies? Stating the provisions of Companies Act, 1956 point out the

circumstances under which such prospectus is required to be filed with the Registrar of

Companies. (PCE, Nov. 2008)

Answer

Section 60 A of the Companies Act, 1956 lays down the provisions as regards shelf

prospectus. According to it, the shelf prospectus means a prospectus issued by any

financial institution or bank for one or more issues of the securities or class of securities

specified in that prospectus.

Therefore, any public financial institution, public sector bank or schedule bank whose

main object is financing shall file a shelf prospectus. A company filing a shelf prospectus



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with the registrar shall not be required to file prospectus afresh at every stage of offer of

securities by it within the period of validity of such self prospectus.

A company fi ling a shelf prospectus shal l be required to fi le an information memorandum

on all material facts relating to charges created, and changes in the financial position as

have occurred between the first offer of securities, previous offer of securities and the

succeeding offer of securities within such time as may be prescribed by Central

Government prior to making of a second or subsequent offer of securities under the shelf

prospectus.

An information memorandum shall be fi led along with such prospectus, which will remain

valid for one year from the date of opening of the first issue of securities under that

prospectus. Updated information memoranda filed with the shelf prospectus shallconstitute the prospectus. Here financing means making loans or subscribing in the

capital of a private industrial enterprise engaged in infrastructural financing or such other

company which the Central Government may so notify in this behalf.

Information memorandum

Question

What are the provisions relating to Information Memorandum contained in Section 60B

of the Companies Act, 1956 [inserted by the Companies (Amendment) Act, 2000]?

(PE-II, May 2006)

AnswerInformation Memorandum: Section 60B of the Companies Act, 1956 (inserted by the

Companies Amendment Act, 2000) provides the following regarding information

memorandum:

1. A public company making an issue of securities may circulate information

memorandum to the public prior to filing of a prospectus.

2. A company inviting subscription by an information memorandum shall be bound to

file a prospectus prior to the opening of the subscription lists and the offer as a red-

herring prospectus, at least three days before the opening of the offer.

3. The information memorandum and red-herring prospectus shall carry sameobligations as are applicable in the case of a prospectus.

4. Any variation between the information memorandum and the red-herring prospectus

shall be highlighted as variations by the issuing company.

Explanation For the purposes of Sub-sections (2), (3) and (4), red-herring

prospectus means a prospectus which does not have complete particulars on the

price of the securities offered and the quantum of securities offered.



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5. Every variation as made and highlighted in accordance with sub-section (4) above

shall be individually intimated to the persons invited to subscribe to the issue of

securities.

6. In the event of the issuing company or the underwriters to the issue have invited or

received advance subscription by way of cash or post-dated cheques or stock-

invest, the company or such underwriters or bankers to the issue shall not encash

such subscription moneys or post-dated cheques or stock invest before the date of

opening of the issue, without having individually intimated the prospective

subscribers of the variation and without having offered an opportunity to such

prospective subscribers to withdraw their application and cancel their post-dated

cheques or stock-invest or return of subscription paid.

7. The applicant or proposed subscriber shall exercise his right to withdraw from the

application on any intimation of variation within seven days from the date of such

intimation and shall indicate such withdrawal in writing to the company and the

underwriters.

8. Any application for subscription which is acted upon by the company or

underwriters or bankers to the issue without having given enough information of

any variations, or the particulars of withdrawing of offer or opportunity for cancelling

the post-dated cheques or stock invest or stop payments for such payments shall

be void and the applicants shall be entitled to receive a refund, or return of its post-

dated cheques or stock-invest or subscription money or cancellation of itsapplication, as if the said application had never been made and the applicants are

entitled to receive back their original application and interest at the rate of fifteen

per cent from the date of encashment till payment of realisation.

9. Upon the closing of the offer of securities, a final prospectus stating therein the

total capital raised whether by way, of debt or share capital and the closing price of

the securities and any other details as were not complete in the red-herring

prospectus shall be filed in a case of a listed public company with the Securities

and Exchange Board and Registrar, and in any other case with the Registrar only.

Question

What is meant by Red-herring prospectus? State the circumstances under which such

prospectus is required to be fi led with the Registrar of Companies. What is the

requirement relating to filing of final prospectus in such cases? (PCE, May 2008)

Answer

Red-herring Prospectus: What requirements of filing (Section 60 B of the Companies

Act, 1956): Red-herring prospectus means a prospectus which does not have complete



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particulars on the price of securities and the quantum of securities offered [Explanation toSection 60B (4)]. A public company making an issue of securities may circulate

information memorandum to the public prior to filing of prospectus [Section 60B (1)]. As

per Section 2(19B), information memorandum means a process undertaken prior to the

filing of prospectus by which a demand for the securities proposed to be issued by the

company is elicited, and the price and terms of issue for such securities is assessed by

means of notice, etc.

A company inviting subscription by an information memorandum shal l be bound to fi le a

prospectus prior to the opening of the subscription lists and the offer as red-herring

prospectus, at least 3 days before the opening of offer [Section 60B (2)]. Exact issue size

or issue price is not mentioned in the red-herring prospectus.On the basis of offers received, company will finalise the issue price and issue size and

then close the offer. After closure of offer of securities, a final prospectus will be prepared

stating the total capital raised whether by way of debts, or share capital and the closing

price of securities and any other details as were not complete in red-herring prospectus.

The prospectus will be filled with ROC and also with SEBI in case of listed company.

[Section 60B (9)].

Mis-statement in prospectus and its consequences

Question

A company issued a prospectus. All the statements contained therein were li terally true. It

also stated that the company had paid dividends for a number of years, but did not

disclose the fact that the dividends were not paid out of trading profits, but out of capital

profits. An al lottee of shares wants to avoid the contract on the ground that the prospectus

was false in material particulars. Decide (PE-II, May 2004))

Answer

Mis-leading Prospectus

Any person who takes shares on the faith of statement of facts contained in a prospectus can

rescind the contract if those statements are false or untrue. The words untrue statement have

to be construed as explained in Section 65(1)(a), which says that a statement included in a

prospectus shall be deemed to be untrue, if the statement is misleading in the form andcontext in which it is included. Again, where the omission from a prospectus of any matter is

calculated to mislead, the prospectus is deemed, in respect of such omission to be a

prospectus in which an untrue statement is included [Section 65(1)(b)].

In this case, the fact that dividends were paid out of capital profit and not out of trading

profits was not disclosed in the prospectus and to that extent the prospectus contained a

material misrepresentation of a fact giving a false impression that the company was a



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profitable one. Hence the allottee can avoid the contract of allotment of shares. ( Rex V.

Lord Kylsant).

Question

When director is not liable for a misstatement in a prospectus?

Answer

When a director is not liable [Section 62(2)] :A person who is held liable for the issue

of a prospectus containing an untrue statement as a director will be exonerated from such

a liability if he can show:

(a) In a suit under Section 62:

(i) that he (having consented to become a director) had withdrawn his consent

to become a director before the issue of the prospectus and that it was

issued without his authority or consent;

(ii) that the prospectus was issued without his authority or consent; and that on

becoming aware of its issue, he forthwith gave reasonable public notice of

the issue having been made without his knowledge or consent; or

(iii) that after the issue of the prospectus and before allotment thereunder he, on

becoming aware of any untrue statement therein, had withdrawn his consent

and given a reasonable public notice of the withdrawal and of the reasonstherefore; or

(iv) that he had reasonable ground to believe and, until allotment, did believe

that the statement was true. This provision pertains to the untrue statement

not purporting to have been made on the authority of an expert or of a public

official document or statement.

(v) that the untrue statement, purporting to be a statement by an expert or

contained in a report or valuation of an expert was a correct and fair

representation of the experts statement and he had reasonable ground to

believe and, until issue of prospectus, did believe that the expert was

competent to make it and the expert had given and had not withdrawn hisconsent to the issue of the prospectus and had not withdrawn it before

delivery of a copy of the prospectus for registration; and

( vi) that the untrue statement, arising from the statement made by an official

person or from the public official documents was a correct and fair

representation or correct copy or correct and fair extract of the document.



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(b) In a suit under Section 56 :

A director or other person sued for non-compliance of Sec tion 56 may

defined himself by proving :

(i) that he had no knowledge of the matter not disclosed;

(ii) that the contravention was an honest mistake of fact;

(iii) that in the opinion of the Court, the matter not disclosed was immaterial or

was otherwise such as ought to be excused.

Question

An allottee of shares in a Company brought action against a Director in respect of false statementsin prospectus. The director contended that the statements were prepared by the promoters and he

has relied on them. Is the Director liable under the circumstances? Decide referring to the

provisions of the Companies Act, 1956. (PE-II, May 2010)

Answer

Yes, the Director shall be held liable. A director can escape liability for mis-statements in a

prospectus only on the grounds specified under Section 62(2). Relying on statements prepared by

promoters is not a ground included there under. Accordingly, no defence shall be available to the

Director. A Director shall not be liable if he puts up the following defences:

(i) If he withdrew his consent before the issue of the prospects and it was issued without his

authority or consent.

(ii) If after the issue of the prospectus and before allotment thereunder, he on becoming aware

of any untrue statement therein, withdrew his consent to the prospectus and gave

reasonable public notice of the withdrawal and reasons therefor.

(iii) If he had reasonable grounds to believe that the statement was true, and he, in fact,

believed it to be true up to the time of allotment.

(iv) If the statement is a correct and fair representation or extract or copy of the statement made

by an expert who is competent to make it, the Director is not liable.

Question

State the remedies available against a company to a subscriber for allotment of shares on

the faith of a misleading prospectus. What conditions must be satisfied by such a

subscriber before opting for theremedies? (PE-II, Nov. 2001)Answer

A person who has been induced to subscribe for shares/debentures on the faith of

misleading prospectus has the following remedies against the company. If there is a



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misstatement of a material information in a prospectus, and if it has induced any

shareholder to purchase shares, he can:

1. rescind the contract, and

2. claim damages from the company whether the statement is fraudulent or an

innocent one. .

Rescission of the Contract

Any person who takes shares on the fai th of statements of fact contained in a prospectus,

can apply to the Court for the rescission of the contract if those statements are false or

fraudulent or if some material information has been withheld. He must, however, apply for

the rescission within a reasonable time and before the company goes into liquidation. But hewill have to surrender to the company the shares allotted to him, His name is then removed

from the register of members and he gets back the money paid by him to the company along

with interest. The contract can be rescinded if the following conditions are satisfied:

1. the statement must be a material misrepresentation of facts.

2. the statement must have induced the shareholder to take the shares,

3. the statement must be untrue.

4. the deceived shareholder is an allottee and he must have relied on the statement in

the prospectus.

5. the omission of material fact must be misleading before rescission is granted.

6. the proceedings for rescission must be started as soon as the allottee comes to

know of a misleading statement in the prospectus on the faith of which he had

subscribed for shares and before the company goes into liquidation.

Rescission is available only if the aggrieved shareholder:

(a) acts within reasonable time;

(b) before the company goes into liquidation;

(c) has not done any act indicating the upholding of the contract to take shares

like:

(1) having attended a meeting of the companyor

(2) accepted dividends declared by the company.

Damages:

Any person induced by a fraudulent statement in a prospectus to take shares is entitled to

sue the company for damages. He must prove the same matters in claiming damages for



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deceit as in claiming rescission of the contract. He cannot both retain the shares and get

damages against the company. He must show that he has repudiated the shares and has

not acted as a shareholder after discovering the fraud or misrepresentation.

Question

With a view to issue shares to the general public a prospectus containing some false

information was issued by a company. Mr. X received copy of the prospectus from the

company, but did not apply for allotment of any shares. The allotment of shares to the

general public was completed by the company within the stipulated period. A few

months later, Mr. X bought 2000 shares through the stock exchange at a higher price

which later on fell sharply. X sold these shares at a heavy loss. Mr. X claims damages

from the company for the loss suffered on the ground the prospectus issued by the

company contained a false statement. Referring to the provisions of the Companies Act,

1956 examine whether Xs claim for damages is justified. (PE-II, Nov. 2006)

Answer

According to Section 62 of the Companies Act, 1956, every direc tor, promoter and every

person who is responsible for the issue of the prospectus containing false or untrue

information are liable to compensate all those persons who subscribe to the shares on the

faith of prospectus. It was held in the case of Peek Vs. Gurney that the above-mentioned

remedy by way or damage will not be available to a person if he has not purchased the

shares on the basis of prospectus. Since X purchased shares through the stock exchangeopen market which cannot be said to have bought shares on the basis of prospectus. X

cannot bring action for deceit against the directors. X will not succeed.

Question

Peek Ltd. Co. issued and published its prospectus to invite the investors to purchase its

shares. The said prospectus contained false statement. Mr. X purchased some partly paid

shares of the company in good faith on the Stock Exchange. Subsequently, the company

was wound up and the name of Mr. X was in the list of contributors. Decide:

(i) Whether Mr. X is liable to pay the unpaid amount?

(ii) Can Mr. X sue the directors of the company to recover damages?(PE-II, May 2008)

Answer

False Statement in Prospectus, the Companies Act, 1956

(i) Yes, X is liable to pay the unpaid amount on the shares. As X has purchased partly

paid shares, so he is liable for the remaining part of the shares. At the time of



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winding up he is liable to contribute a contributory. The related case law in this

subject matter is Peak vs. Gurney.

(ii) No, X cannot sue the directors to recover damages for the misstatement. The

shareholder must have relied on the statement in the prospectus in applying for

shares. If a person purchases shares in open market, the prospectus ceases to be

operative. In the present case, Mr. X purchased shares in good faith on the stock

exchange. He had not relied on the statement in prospectus. So he cannot sue.

Question

M applies for share on the basis of a prospectus which contains misstatement. The

shares are allotted to him, who afterwards transfers them to N. Can N bring an action for arescission on the ground of mis-statement? Decide under the provisions of the Companies

Act, 1956. (PE-II, Nov . 2008)

Answer

Mis-statement in prospectus

No, N cannot bring an action for rescission on the ground of mis-statement as N had not

contracted with the company on the basis of prospectus containing mis-statement. The

right to rescind the contract is available only to original allottees (Peek vs Gurney).

Question

Modern Furnitures Limited was willing to purchase teakwood estate in Chhattisgarh State.

Its prospectus contained some important extracts from an expert report giving the number

of teakwood trees and other relevant information in the estate in Chhattisgarh State. The

report was found inaccurate. Mr. 'X' purchased the shares of Modern Furnitures Limited

on the basis of the above statement in the prospectus. Will Mr. 'X' have any remedy

against the company? When will an expert not be liable? State the provisions of the

Companies Act, 1956 in this respect. (PCE, Nov.2009)

Answer

In the event of any mis-statement in a prospectus, the allottees have certain remedies

against the company as well as against those who were responsible for the issue of such

a prospectus. Thus, in the present case the allotee Mr. X shall have the right to claim

compensation from Modern Furnitures Ltd., for any loss that he might have sustained in

terms of the value of shares. But his claim against those responsible for issue of

prospectus shall not succeed since they made the statement on the basis of the report of

an expert whom they believed to be competent. Section 62(2) of the Companies Act, 1956

provides that in such circumstances, one shall not incur liability. However, the expert can

be proceeded against, for the inaccurate report which he had made.



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An expert shall not be liable if he proves:

(i) that having given his consent, he withdrew it in writing before delivery of the copy

of prospectus for registration or

(ii) that after delivery of prospectus for registration and before allotment he became

aware of the untrue statement and withdrew his consent in writing and gave

reasonable public notice of the withdrawal and his reasons therefor; or

(iii) that he was competent to make the statement and believed on reasonable grounds

that it was true.

Offer for sale or Prospectus by implication or Deemed prospectus

Question

Explain the concept of Deemed Prospectus under the Companies Act, 1956. Point out

the circumstances where under issuing the prospectus is not mandatory.

(PE-II, May 2004)

Answer

Deemed Prospectus

In order to avoid the rigorous requirements of prospectus, one practice was to issue

shares to another person. Such other person (often called Issue House) would then

make further offer of sale of their shares to public by advertisements, etc. In order to curbthis tendency Section 64 provides that offer of sale or advertisement of such Issue

House will be deemed to be prospectus issued by the company. This is called deemed

prospectus. All enactments and rules of law as to the contents of prospectus and as to the

liability in respect of statements, omissions from prospectus under Section 60, the

persons making the offer of sale to the public are to be deemed as directors of the

company [Section 64(4)].

The offer of sale by Issue House will not be considered as Prospectus only when (a)

company receives full consideration in respect of shares/debentures allotted to Issue

House or agreed to be allotted to them and (b) offer of sale is made at least 6 months

after the shares were allotted to them [Section 64(2)].Additional information to be stated in such documents are (1) net amount of consideration

received or to be received by the company in respect of shares or debentures to which

offer relates and (2) place and time at which the contract under which the shares or

debentures have been allotted or are to be allotted may be inspected [Section 64(3)].



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When Prospectus need not be issued

The issue of prospectus under Section 56 of the Companies Act, 1956 is not necessary in

the following circumstances even though the shares are offered and applications forms

issued to the public by the company:

(i) Where a person is a bona fide invitee to enter into an underwriting agreement with

regard to shares or debentures. (Section 56(3)(a)].

(ii) Where shares or debentures are not offered to the public (Section 56(3)(b)].

(iii) Where shares or debentures offered are in all respects uniform with shares or

debentures already issued and quoted at a recognised Stock Exchange. (Section

56(5)].

(iv) Where the shares or debentures are offered to the existing shareholders or

debenture-holders respectively [Section 56(5)].

Small Depositors

Question

Define the term Small Depositors. State the legal provisions relating to acceptance,

repayment and further deposits of such small depositors under the Companies

Amendment Act, 2000. (PE-I I, Nov. 2002)

AnswerDefinition of Small Depositors:

According to Section 58A of the Companies (Amendment) Act, 2000 a small depositor means

a depositor who has deposited in a financial year a sum not exceeding twenty thousand

rupees in a company and includes the successors, nominees and legal representatives. It

does not include those depositors who renew their deposits and those depositors whose

repayment is not made due to death or has been stayed by a competent court.

Acceptance, repayment and further deposits:

1. Every company accepting deposit from the small depositor shall intimate to the

Company Law Board (now Tribunal) within fifty days, the name and address of eachsmall depositor to whom it had defaulted in repayment of deposit or interest

thereon. Thereafter the intimation shall be given on a monthly basis.

2. On receipt of the intimation, it shall direct the company to repay the deposit and for

this purpose an appropriate order is to passed within thirty days if it is delayed an

opportunity to the small depositor must be given of being heard, for this purpose

presence of the small depositor is not essential.



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3. Restriction on the company:

(a) Unless the company repays all matured deposits along with interest due

thereon, it shall not accept further deposits form small depositors.

(b) If on any occasion, if company makes default in repayment of small deposits,

it shall state in all its future advertisement and application inviting deposits

the details regarding total number of small depositors and the amount due

thereon.

(c) Where the interest accrued on small deposits has been waived, such fact

must be mentioned in every future advertisement and application for inviting

deposits.(d) The application form inviting deposits must contain a statement that the

applicant had been appraised of every past default, waiver of interest, etc.

(e) If the company subsequent to acceptance of small deposits avails any

working capital from any bank, it shall first be utilized for repaying the

principal and interest due to small depositors before applying the funds for

any other purpose.

(f) The penalty for failure to comply with the provisions of section 58AA or order

of Company Law Board (now, Tribunal) is subject to a fine of Rs. 500 per day

and imprisonment upto three years. The directors are also liable to be

proceeded against. Such offence shall be cognizable offence under theCriminal Procedure Code. No court shall take cognizance of any offence

under this provision except on a complaint made by the Central Government

or any officer authorized by it in this behalf.

Question

Several small depositors of Overtrading Company Ltd., have made complaints about non-

refund of the deposits after due date. Explain briefly (1) the meaning of small depositor

and (2) the duty of the company after the default has taken place in the matter of

repayment of the deposits. (PE-II, May 2005)

Answer

Meaning of Small Depositor:According to Section 58AA of the Companies Act, 1956, a

small depositor means a depositor who has deposited in a financial year a sum not

exceeding Rs. 20,000/- in a company and includes his successors, nominees and legal

representatives.

Duty of company in case of default in repayment of deposits: Every company accepting

deposits from small depositors should intimate the Company Law Board/Tribunal within 60



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days of the date of default the name and address of each small depositor to whom it had

defaulted in repayment of deposit or interest thereon. Thereafter, the company should

also give intimation to the Company Law Board/ Tribunal on a monthly basis.

Allotment of Shares

Question

What do you mean by Allotment of shares?

Answer

Allotment is the acceptance by the company of such offers to take shares. It is an

appropriation of shares to an applicant for shares.and appropriation out of the previously

unappropriated capital of the company. That is why, if the shares which have been

forfeited are reissued, you cannot call it an .allotment.. The word .allotment. gives us the

notion of a .lot.. Therefore, there must first be a lot of shares, then the division of them

into value or classes and lastly allocation of them among various applicants [Calcutta

Stock Exchange Association, In re., 61 C.W.N. 418 - 0957 Cal. 438].

Minimum Subscription and Refund &Restriction on use of Application Moneys

Question

Define Minimum Subscription. When it is liable to be refunded? Can share application

money be deposited in any bank?

Answer

Minimum subscription is the minimum amount as stated in the prospectus, which in the

opinion of directors must be raised by the issue of share capital to start with. The amount

shall be utilised to meet the following expenditure:

1. Purchase price of the property bought or to be bought.

2. Any preliminary expenses.

3. Underwriting commission.

4. The repayment of money borrowed by the company for the above purposes.

5. Working capital and6. Any other expenditure stating the nature and purpose with estimated amount in

each case.

Section 69(3) of the Companies Act, 1956 provides the amount payable on

application on each share shall not be less than 5% of the nominal amount of share

capital and Part I of schedule II to the Companies Act stipulates that a declaration

should be made in the prospectus that if the company does not receive the



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minimum subscription of 90% within 90 days from the closing of the issue, the

company must refund the amount. In case of development, no time-limit is

prescribed therein. Hence a company is believed to obtain the minimum

subscription plus development amount within 90 days of the closure of the issue.

From the above provisions, it may be inferred that the amount of minimum

subscription cannot be less that 90% of the 5% of the nominal value of the public

issue, It may be noted that the public issue may be made for a sum which is larger

than the amount required by way of minimum subscription and the minimum

subscription may be stipulated as larger than the sum payable on application.

The SEBI guideline provides that if minimum subscription plus development amount

(i.e., the amount payable by underwriters in case of under subscription of shares as

per the underwriting, contract) if any, is not received within a period of 120 days of

the opening of the issue, all monies received from the applicants for shares must

be forthwith repaid to them without interest. In case any such money is not repaid

within 10 days after such 120 days, the company shall be liable to repay that

money with interest at prescribed rate (presently 15% p.a).

The time limit requirements of 120 days differ from the provision of schedule II of

Companies Act which requires a time limit of 90 days from the closing of the issue

for obtaining minimum subscription.

Section 73 of the Companies Act provides for payment of interest on excess

application money from the expiry of the 78 th day from the closing of subscription

list. Hence, the refund of application money within 120 days from the opening of

subscription list is without prejudice to the companys liability for payment of

interest on delayed refunds pursuant to Section 73 of the Companies, Act.

Pursuant of Part I of Schedule II, the company is also required to make a

declaration of any delay in refund at the prescribed rate under Section 763(2), (2A).

Question

What is Minimum Subscription and Opening of Subscription List in Public Issue of Shares?

Answer

According to Section 69 of the Companies Act, 1956 minimum subscription is the amount

which in the opinion of the Board of Directors of the company must be raised by the issue

of those shares which are offered to the public for subscription with a view to provide for

the following purposes:

(1) The purchase price of any property which requires to be out of the proceeds of the issue.(2) Any preliminary expenses payable by the company and any commission payable for

the sale of shares.



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(3) The repayment of any monies borrowed by the company for any of the above saidtwo matters.

(4) Working capital.(5) Any other expenditure stating the nature and purpose thereof and the estimated

amount.

The purpose behind the provision of minimum subscription is to prevent a company from

starting its business without adequate financial resources. This is also an investor

protection measure as the company has to refund the amounts collected on applications

in case the minimum subscription as stated in the prospectus is not received . Shares

cannot be issued immediately after the issue of prospectus According to Section 72(1), noallotment shall be made until the beginning of the 5 th day from the date of issue of

prospectus . This is known at the time of opening of subscription list. The subscription list

for public issues should be kept open for at least 3 working days and this fact should be

stated in the prospectus .The maximum period of keeping the subscription list open is 22

days if the issue was underwritten and 10 days in other cases. The object of this provision

is to give applicants sufficient time to study the prospectus and to withdraw their offer to

subscribe for the shares in case they are not satisfied with the prospectus.

Question

State with reason, whether the following statement is correct or incorrect, according to the

Companies Act, 1956.

In the case of Public issue of shares, the subscription list is to be kept open for a minimum period

of 3 working days. (PE-II, May 2010)

Answer

Correct . The subscription list for public issues should be kept open for at least 3 working days and

a disclosure to this effect should be made in the prospectus.

Question

What is Minimum Subscription? Briefly state important provisions of the Companies Act,

1956 on refund and deposit?Answer

Minimum subscription is the minimum amount as stated in the prospectus, which in the

opinion of directors must be raised by the issue of share capital to start with. The amount

shall be utilized to meet the following expenditure:

1. Purchase price of the property bought or to be bought.



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2. Any preliminary expense.

3. Underwriting commission.

4. The repayment of money borrowed by the company for the above purposes.

5. Working capital; and

6. Any other expenditure stating the nature and purpose with estimated amount in

each case.

Section 69(3) of the Companies Act, 1956 provides the amount payable on application on

each share shall not be less than 5% of the nominal amount of share capital and Part I of

schedule II to the companies act stipulates that a declaration should be made in the

prospectus that if the company does not receive the minimum subscription of 90% within90 days from the closing of the issue, the company must refund the amount. In case of

development, no time limit is prescribed therein. Hence, a company believed to obtain the

minimum subscription plus development amount within 90 days of the closure of the issue.

Question

In what way does the Companies Act, 1956 regulate and restrict the following in respect

of a company going/or public issue of shares :

(i) Minimum Subscription: and

(ii) Application Money payable on shares being issued ? Explain. (PE-II, May 2001)

AnswerThe Companies Act, 1956 by virtue of provisions as contained in Section 69 (1) and

Section 69 (3) to (6) regulate and restrict the minimum subscription and the application

money payable on shares being issued by a company going for public issue of shares.

These sections provide as under:

Minimum subscription [Section 69 (1)]

No Allotment shall be made of any share capital of a company offered to the public for

subscription; unless; -

(a) the amount stated in the prospectus as the minimum amount hasbeen subscribed,

provided that such amount shall not be less than 5% of the nominal amount of the

shares being issued; and

(b) the sum payable on application for such amount has been paid to and received by

the company-

If the application are not received by the company for such quantum of shares for

making the minimum subscription, within 120 days after the issue of prospectus, all

money received from the applicants for share shall be repaid without interest. If any



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such money is not repaid within 130 days after the issue of prospectus, moneys will

be repaid with interest at the rate of 6% from the expiry of 130 days.

Application money:

Section 69 (3) provides that the amount payable on application on each share shall not be

less than 5% of the nominal amount of the share. All moneys received from application for

shares shall be deposited and kept deposited in a Schedule Bank:

(a) until the certificate to commence business is obtained under Section 149, or

(b) where such certificate has already been obtained, until the entire amount payable

on application for shares in respect of the minimum subscription has been received

by the company, and where such amount has not been received by the companywithin the time on the expiry of which the moneys received from the applicant for

shares are required to be repaid without interest under Sub-section (5), all moneys

received from applications for shares shall be returned in accordance with the

provisions of that sub-section, as stated above.

Question

State briefly the provisions relating to minimum subscription and consequence of non-

receipt of minimum subscription as per the Companies Act, 1956 and the provisions as

per SEBI guidel ines. (PE-II, May 2005)

Answer

In terms of Section 69(1) of the Companies Act, 1956 every prospectus for shares must

contain an indication as to the minimum amount which in the opinion of the Board of

directors must be raised. The amount so stated in the prospectus which shall be reckoned

exclusively of any amount otherwise than in money is referred to as the minimum

subscription. The amount payable on application of each share shall not be less than 5%

of the nominal amount of the shares.

If the applications are not received by the company for such quantum of shares for making

minimum subscription within 120 days of the issue of prospectus, all moneys received

from the applicants for shares shall be repaid without interest. If such money is not repaid

within 130 days after the issue of prospectus, money will be repaid with interest @6% p.a.after the expiry of 130 days.

Position as Per Sebi Guidelines: As per SEBI guidelines, the minimum subscription in

respect of public and rights issue shall be 90% of the issue amount. The requirement of

90% minimum subscription shall not be mandatory in case of offer for sale of securities. In

case of non-receipt by the company of 90% of the issued amount from public subscription

plus accepted development from underwriters or from other sources in case of under-



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subscribed issues, within 60 days from the date of closure of the issue, the company shall

refund forthwith the subscription amount in full without interest and with interest @15%

p.a. if not paid within 10 days after expiry of the said 60 days.

[SEBI Guidelines are rescinded and replaced by the ICDR(Regulations) 2009]

Question

A public limited company which went in for Public issue of shares had applied for list ing of

shares in three recognised Stock Exchanges and out of it only two had given permission

for listing. Can the company proceed for allotment of shares?

Answer

Every public company is required before issuing shares for public subscription by issue of

prospectus to make an application for listing the security in one or more recognised stock

exchanges [(Section 73(1)]. The prospectus shall state the names of the stock exchanges to

which application has been made. If the permission has not been granted by the stock

exchange or each stock exchange before the expiry of 10 weeks from the date of the closing

the subscription the allotment made shall become void. (Section 73(lA)]. An appeal may be

preferred against the decision of any recognised stock exchange refusing the aforesaid per-

mission for enlistment under Section 22 of the Securities Contracts (Regulation) Act, 1956

and then such allotment shall not be void, until the dismissal of the appeal. It shall be

deemed that permission has not been granted if the application for permission has not been

disposed of within the period specified in Section73(lA), i.e. before the expiry of 10 weeksfrom the closing of the subscription lists (Section 73(5)]. Where the permission has not been

applied for or having been applied for has not been granted, the application money received

must be refunded to the applicants forthwith without any interest. If the money is not

refunded within 8 days after the company becomes liable to repay it, the company and every

director of the company who is in default shall, on and from the expiry of the eighth day be

jointly and severally liable to repay the money with interest at such rate which shall not be

less than 4% and not more than 15% as may be prescribed, having regard to the length of

the period of delay in making the repayment of such money (Section 73(2). All moneys

received as application and allotment money shall be kept in a separate bank account

maintained with a scheduled bank until the permission is granted, failure to do so is a

punishable offence (Section 73(3).

Question

Explain the consequences of failure to get the shares listed in Stock Exchanges named in

the prospectus by a public company, under the provisions of the Companies Act, 1956.

Or



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A public limited company which went in for Public issue of shares had applied for list ing ofshares in three recognized Stock Exchanges and out of it only two had given permission

for listing. Can the company proceed for allotment of shares?

Answer

Listing of Shares: Every public company is required before issuing shares for public

subscription by issue of prospectus, to make an application for listing the security in one or more

recognised stock exchanges [section 73(1)]. The prospectus shall state the names of the stock

exchanges to which application has been made. If the permission has not been granted by the

stock exchange or each stock exchange before the expiry of 10 weeks from the date of the

closing the subscription the allotment made shall become void. [Section 73(1A)]. An appeal may

be preferred against the decision of any recognised stock exchange refusing the aforesaidpermission for enlistment under section 22 of the Securities Contracts (Regulation) Act, 1956

and then such allotment shall not be void, until the dismissal of the appeal. It shall be deemed

that permission has not been granted if the application for permission has not been disposed of

within the period specified in section 73(1A) i.e. before the expiry of 10 weeks from the closing of

the subscription lists [section 73(5)]. Where the permission has not been applied for or having

been applied for, has not been granted, the application money received must be refunded to the

applicants forthwith without any interest. If the money is not refunded with 8 days after the

company becomes liable to repay it, the company and every director of the company who is in

default shall, on and from the expiry of the eighth day be jointly and severally liable to repay the

money with interest at such rate which shall not be less than 4% and not more than 15% as may

be prescribed, having regard to the length of the period of delay in making the repayment of

such money [section 73(2)]. All moneys received as application and allotment money shall be

kept in a separate bank account maintained with a scheduled bank until the permission is

granted, failure to do so is a punishable offence [section 73(3)].

Question

When is an Allotment of Shares treated as an irregular allotment? State the effects of an

irregular allotment. (PE-II, May, 2002)

Answer

Irregular allotment:

Allotment of shares is irregular when it has been made by a company in violation of

Section 69 and 70. Thus:

1. where the company has issued a prospectus, the allotment is irregular if it; (i) has

not been able to raise the amount of minimum subscription, (ii) has not collected

application money (which shall not be less than 5% of the nominal amount of the

shares); and (iii) has not kept the money so received in a Scheduled Bank.



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2. where the company has not issued a prospectus, the allotment is irregular if it does

not file with the Registrar for registration, a statement in lieu of prospectus at least

3 days before the first allotment of shares.

Inspite of these stringent provisions, sometimes on allotment is made by the directors in

under disregard of the provisions, such an allotment is treated by the Act not as void ab

initio but as irregular.

Effects of irregular allotment:

Allotment is voidable at the option of the allotee:The option must be exercised by the

allotee: (a) within 2 months after holding of the statutory meeting of the company, or (b)

where the company is not required to hold a statutory meeting, or where the allotment ismade after the holding of statutory meeting, within 2 months after the date of allotment.

Notice of avoidance given within this time will be sufficient, though actual legal

proceedings if necessary, may be commenced thereafter. Such an allotment is avoidable

even if the company is in the course of winding up (Re National-Motor Mail Coach Co. Ltd.

1908 Ch. 228).

It is not necessary that the allottee should commence actual legal proceedings within 2

months. It is enough for him to give a notice to the company of his intention to revoke the

allotment.

Compensation:Any director, who has knowledge of the fact of the irregular allotment ofshares, shall be liable to compensate the company and the shareholder respectively for

any loss, damages or costs which the company or the allotee may have sustained or

incurred there by Proceedings to recover any such loss, damages or costs can be only be

commenced within 2 years from the date of the allotment.

Question

After receiving 80% of the minimum subscription as stated in the prospectus, a company

allotted 100 equity shares in favour of X. The company deposited the said amount in the

bank but withdrew 50% of the amount, before finalisation of the allotment, for the

purchase of certain assets. X refuses to accept the allotment of shares on the ground that

the allotment is violative of the provisions of the Companies Act, 1956. Comment.

(PE-II, May 2003)

Answer

Allotment of Shares

The company has received 80% of the minimum subscription as stated in the prospectus.

Hence the allotment is in contravention of section 69(1) of the Companies Act 1956 and



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the allotment is irregular attracting the provisions of Section 71 of the Companies Act

1956.

The consequences of such irregular allotment are as follows:

The allotment is rendered voidable at the option of the applicant. The option must

however be exercised -

(i) With in 2 months after the holding of the statutory meeting of the Company; or

(ii) Where the Company is not required to hold a statutory meeting or where the

allotment is made after the holding of the statutory meeting, within 2 months after

the date of allotment [Section 71(1)].

The irregular allotment is voidable even if the company goes into liquidation on the

meantime [section 71(2)].

In view of the above, refusal by X to accept the allotment of shares on the ground that

the allotment is violative of the provisions of the Companies Act is valid provided he has

exercised his option to avoid the allotment within the period mentioned in Section 71(1) of

the Companies Act, 1956

The Company has also violated the provisions of Section 69(4) of the Companies Act

1956 in withdrawing 50% of the amount deposited with the bank before receiving the

entire amount payable on application for shares in respect of the minimum subscription.

Question

The Board of Directors of M/s Reckless Investments Ltd. have allotted shares to the

investors of the company without issuing a prospectus or filing a statement in lieu of

prospectus with the Registrar of Companies, Mumbai. Explain the remedies available to

the investors in this regard. (PE-II, Nov. 2003)

Answer

According to the provisions of Section 70 and 71 of the Companies Act, 1956, any

allotment of shares by a company without filing a prospectus or statement in lieu of

prospectus will become irregular allotment. The effect of it is that the allotment made by

M/s Reckless Investment Ltd will become voidable at the instance of the allottee i.e., theapplicant for the shares within a period of two months from the date of allotment. The

allotment is voidable at the option of the investor applicant even if the company is in the

course of winding up. Further, the directors liable for the default are also liable to

compensate the company and the allottee respectively for any loss to which the company

may have sustained or incurred thereby. There is a time limit of two years for claiming

damages for loss. etc., by the investors.



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Question

Mars India Ltd. owed to Sunil Rs. 1,000. On becoming this debt payable, the company

offered Sunil 10 shares of Rs. 100 each in full settlement of the debt. The said shares

were fully paid and were allotted to Sunil.

Examine the validity of these allotments in the light of the provisions of the Companies

Act, 1956. (PE-II, Nov . 2005)

Answer

Allotment of Shares:As per the Section 75 of the Companies Act, 1956 when shares are

allowed to a person by a company, payment may be made (i) in cash, or (ii) in kind (with

the consent of the company).

Cash here does not necessarily mean the current coin of the country. It means such

transaction as would in an action at law for calls, support a plea of payment.

On the basis of the above provision and decision of the related case Coregam Gold

Mining Co. of India V. Roper, (1892), A.C. 125, the allotment of fully paid up shares in full

satisfaction of Sunils debt is valid. Question

Explain the provisions and main contents of Return of Allotment under the Companies

Act, 1956. (PE-II , May 2008)

Answer

Return of Allotment (Section 75, Companies Act, 1956):Within thirty days of allotment

of shares, a company is required to send the Registrar a report, known as the return as

to allotment. It must contain the following particulars:

1. The number of nominal amount of shares allotted; the names, addresses, the

occupation of the allottees; the amount, if any, paid or payable on each share. No

share should be shown as allotted for cash unless cash has actually been received

in respect of the allotment.

2. Contracts in writing under which shares have been allotted for any consideration

other than cash, must be produced for examination of the Registrar.

3. Where bonus shares have been issued, the returns must show the nominal amount

of the shares allotted; names and addresses and occupations of the allottees and a

copy of the resolution authorizing the issue of such shares.

4. Where the shares have been issued at a discount, the return must include a copy of

the resolution authorizing such an issue, a copy of the Tribunals order sanctioning

the issue, and where the rate of discount is more than ten percent, a copy of the

order of the Central government permitting the issue.



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Underwriting

Question

Explain clearly the meaning of the term Underwriting and Underwriting Commission. In

what way, does the Companies Act, 1956 regulate payment of such Commission ?

Explain. (PE-II, May 2001)

Or

In what way does the Companies Act, 1956 regulate the payment of underwriting

commission? Explain the provisions of the Act, state the conditions to be complied with

before payment of such commission can be made to underwriters of the company.

(PE-II, Nov. 2005)Answer

Underwriting is a contract entered into between the company and certain parties (called

underwriters) before the shares or debentures are offered to the public for subscription.

The contract is that in case the whole or an agreed portion of the shares or debentures

are not applied for, then the underwriters will themselves apply for subscribed shares or

debentures; alternatively, they will procure persons to apply for them. The company is

least concerned with how the underwriters procure the purchasers. Thus, the underwriters

expose themselves to a great risk in placing the shares before the public. And in return

for this exposure to the risk the underwriters get commission. The commission is payable

on the amount of shares underwritten. It will be payable even if the underwriters are notultimately called upon to take up any shares.

Conditions to be satisfied:

Payment of underwriting commission is regulated by the provisions of Companies Act,

1956 stating certain conditions as contained in Section 76. The conditions to be fulfilled

are:

(i) the payment of commission should be authorised by the articles.

(ii) the names and addresses of the underwriters and the number of shares or

debentures underwritten by each of them should be disclosed in the prospectus.

(iii) the amount of commission should not exceed, in the case of shares, 5% of the

price at which the shares have been issued or the amount or rate authorised by the

articles whichever is less, and in the case of debentures it should not exceed

2-1/2%.

(iv) the rate should be disclosed in the prospectus, or in the statement in lieu of

prospectus (or in a statement in prescribed form signed in the like manner as the

statement in the lieu of prospectus) and should be filed with the Registrar along

with a copy of the underwriting contract before the payment of the commission.



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(v) the number of shares or debentures which persons have agreed to subscribe absolutely

or conditionally for commission, should be disclosed in the manner aforesaid.

(vi) a copy of the contract for the payment of the commission should be delivered to the

Registrar along with the prospectus or the statement in lieu of prospectus for registration.

Section 76 (4A) clarifies that commission to the underwriters is payable only in

respect of those shares or debentures which are offered to the public for subscription.

However where, (i) a person, who for a commission has subscribed (or agreed to

subscribe) for shares or debentures of a company and before the issue of the

prospectus (or statement in lieu of prospectus) for such shares or debentures, some

other person (or persons) has subscribed for any or all of them, and (ii) such a fact

together with the aggregate amount of commission payable to the underwriter is

disclosed in such prospectus (or statement in lieu of prospectus), then the company

may pay commission to the underwriter in the respect of his subscription irrespective

of the fact that the shares or debentures have already been subscribed.

Question

The Board of Directors of a company decide to pay 50% of issue price as underwriting

commission to the underwriters. On the other hand the Articles of Association of the

company permit only 3% commission.The Board of Directors further decide to pay the

commission out of the proceeds of the share capital. Are the decisions taken by the Board

of Directors valid under the Companies Act, 1956? (PE-II, May 2003)Answer

Underwriting Commission

Considering the provisions of Section 76 of the Companies Act, 1956:

(i) The payment of commission should be authorised by the articles.

(ii) The amount of commission should not exceed, in the case of shares, 5% of the price at

which the shares have been issued or the amount or rate authorised by the articles

whichever is less, and in the case of debentures, it should not exceed 2-1/2%.

Answer to problem:

Thus taking into account the above provisions it is concluded that the Board of Directors

decision to pay 5% is not valid, since the payment cannot exceed 3% as provided in the

Articles of the company. Secondly, decision of the Board to pay the commission out of

capital is valid since underwriting commission can be paid both out of capital as well as

out of profits (Madan Lal Fakir Chand v. Shree Changdeo Sugar Mills Ltd. MR (1962)

S.C. 1543).



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Question

The Articles of Association of MSW Ltd. contained a provision that upto 4% of issue price

of the shares may be paid as underwriting commission to the underwriters. The Board ofdirectors decided to pay 5% underwriting commission. Can the Board of directors do so ?State the provisions of law in this regard as stated under the Indian Companies Act, 1956.

(PCE, Nov. 2008)

Answer

According to the provisions of Section 76 (1) of the Companies Act, 1956 a company may

pay a commission to any person who agrees to subscribe or procure subscription for an

agreed number of shares or debentures of the company. Such commission may be paid to

the underwriters who offer guarantee to procure applications for certain number of sharesand guarantee to purchase the balance quantity of shares. For this, the underwriter getsunderwriting commission. Maximum total commission payable cannot exceed 5% of the

price of shares or the underwriter may be paid a lower rate if so prescribed by articles. Incase of debentures it is 2% or a lower rate if so prescribed in the articles.

In the given problem the articles of MSW Ltd has prescribed 4% underwriting commission

but the directors decided to pay 5% underwriting commission. The directors cannot do sobecause under Section 76 (1) as aforesaid, such commission cannot be more than that

prescribed in the articles. Therefore the directors are not empowered to do so. Further,such amount of commission payable must be authorized by articles. The agreed

commission should be disclosed in the prospectus or the statement in lieu of prospectus.

Copy of the contract for payment of commission must be filed with Registrar of companiesat the time of the delivery of the prospectus or letter of offer. [Section 76 (1)]. An

underwriter must be also registered with SEBI.

Purchase of own shares and financial assistance for purchase of own shares

Question

Apex Metals Limited wants to provide financial assistance to its employees, to enablethem to subscribe for certain number of fully paid shares. Considering the provision of the

Companies Act, 1956, what advice would you give to the company in this regard?

(PE-II, Nov. 2008)

Answer

Financial assistance for purchase of own shares

Section 77 of the Companies Act, 1956 provides that no public company and no privatecompany being a subsidiary of a public company, can give financial aid to any person,

either directly or indirectly and whether by way of loan, guarantee or surety or otherwise,for or in connection with purchase or subscription made or to be made of any of its own

shares or of its holding company.



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There are, however, certain exceptions to this rule, namely-

(a) a banking company may lend money for the purpose in the ordinary course of its

business but not on the security of its own shares, or

(b) The company in pursuance of a scheme for the purchase of or subscription for fully

paid shares of the company(or those of its holding company) to be held by trustees

for the benefit of the employees of the company, may advance loan for the

purpose.

(c) The company may advance a loan to a person bonafide in its employment (other

than directors or managers) to enable them to purchase or subscribe for fully paid

shares for an amount not exceeding their salary or wages for a period of sixmonths.(section 77)

However, the exception to this rule allows making of loans by a company, to its bonafide

employees for purchasing or subscribing to the fully paid shares of the company. Section

77(3) provided that such financial assistance should not exceed six months wages or

salary of the employee.

Question

A Company wants to provide financial assistance to its employees to enable them to

subscribe for fully paid shares of the company. Does it amount to purchase of its own

shares. If, in the instant case, the company itself purchasing to redeem its preferenceshares, does it amount to acquisition of its own shares?

Answer

Section 77 of the Companies Act, 1956 allows advancing of loan by a company to its bona

fide employees for purchasing or subscribing to fully paid shares of the company.

However, such financial assistance should not exceed six months wages or salary of the

employee. If the company is purchasing for redeeming its preference shares, it does not

attract Section 77.

Whether a company can buy back its own shares?

QuestionA public company proposes to purchase its own shares. State the source of funds that can

be utilised by the company for purchasing its own shares and the requirements to be

complied with by the company under the Companies Act before and after the shares are

so purchased. (PE-II, May 2000, Nov. 2004)

Or



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ADJ Company Limited decides to buy-back its own shares. Advise the company's Board ofDirectors about the sources out of which the company can buy-back its own shares. What

conditions are attached to the buy-back scheme of the company in accordance with the

provisions of the Companies Act, 1956? Explain. (PCE, Nov . 2007)

Answer

Sources of funds for buy-back of shares: A company can purchase its own shares or

other specified securities. The purchase should be out of:

(i) its free reserves; or

(ii) the securities premium account; or

(iii) the proceeds of any shares or other specified securities.

However, buy-back of any kind of shares or other specified securities cannot be made out

of the proceeds an earlier issue of the same kind of shares or same kind of other specified

securities [Section 77A(l)].

Specified securities includes employees stock option or other securities as may be

notified by the Central Government from lime to time. [Explanation (a) under Section 77A],

Requirements to be complied with before buy-back: The company shall not purchase

its own shares or other specified securities unless:

(a) the buy-back is authorised by its articles;

(b) a special resolution (also Declaration of Solvency to be filed with ROC & SEBI incase shares are listed on any recognised stock exchange), authorising the buy-

back is passed in general meeting of the company;

(c) the buy-back is or less than 25% of the total paid-up capital and free reserves of

the company;

Provided that the buy-back of equity shares in any financial year shall not exceed

25% of its total paid up equity capital in that financial year.

(d) the ratio of the debt owed by the company is not more than twice the capital and

free reserves after such buy-back;

Provided that the Central Government may prescribe a higher ratio of the debt than

that specified under this clause for a class or classes of companies. The expression

debt includes all amounts of unsecured and secured debts,

The expression free reserves shall have the same meaning assigned to it in

Clause (b), Explanation to Section 372A, which means those reserves which, as

per latest audited balance-sheet of the company are free for distribution as

dividend and shall include balance to the credit of the securities premium account

but shall not include share application money.



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(e) all the shares or other specified securities for buy-back are fully paid-up;

(f) the buy-back of the shares or other specified securities listed on any recognised

stock exchange is in accordance with the regulations made by SEBI in this behalf;

(g) the buy-back in respect of shares or other specified securities other than those

specified in Clause (f) is in accordance with guidelines as may be prescribed.

[Sections 77A(2) and 77A(6)].

The notice of the meeting at which special resolution is proposed to be passed

shall be accompanied by an explanatory statement slating;

(a) a full and complete disclosure of all material facts;

(b

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